Funding an MBO

What Is a Management Buy Out?

Before we get started, let’s make sure we’re all on the same page regarding the definition of a management buy out or MBO as they’re often called. An MBO is when someone within the business takes control by buying out the existing owners. Often, these people are directors, managers, non-executive directors or employees.

You may also hear the term management buy-in banded about. A management buys in or MBI is when an external party becomes involved by buying out the existing owners.

This blog post will focus on funding an MBO.

What Do Lenders Look At?

Lenders come in all shapes and sizes and the type that like funding an MBO include everything from high street banks to independent financiers, and from asset-based lenders to private equity firms. The vehicle can be an unsecured business loan, a secured business loan, invoice finance, asset finance, equity or a combination. Each will have their own considerations, but we will cover some of the key ones that they will look at – and you should too.

What’s the Rationale for the Transaction?

One of the most common reasons is that the owner is looking to retire or possibly looking for a change of direction. Perhaps they’re looking for a well-earned payday and want to capitalise on the value they have created. Alternatively, if things haven’t quite gone to plan and the business is under-performing or distressed, this could create the chance for a tired owner to get out, thereby allowing a new owner to re-energise the operation. Another common reason is that a director or manager of a division, possibly with a small stake, sees an opening to break away and become a standalone business.

What’s Your Contribution?

You might have heard the terms ‘skin in the game’ and ‘hurt money’ – neither of which are particularly pleasant on the ears. Basically, the lender wants to know what you’re contributing to purchase. It isn’t as simple as saying you must put 10% in; the key thing is that it’s a meaningful amount for you – lenders appreciate you don’t have an endless supply of money or you wouldn’t be thinking about funding an MBO. This demonstrates your commitment to the deal and indicates that you won’t walk away if things get tough because you’ll stand to lose your investment. It also reduces how leveraged the transaction is (the ratio of debt to equity) which also helps with affordability as the more you borrow, the more you must repay.

What’s the Deal?

Perhaps the most obvious point is the deal itself. What’s the purchase price or consideration? how did you arrive at that value? and how is the transaction structured?. In the corporate world, the price agreed is often a multiple of EBITDA (earnings before interest, tax, depreciation & amortisation) which is a measure of profit. The multiple depends on many factors including the industry. If the business is lucky enough to have a recurring revenue stream then the price may be a multiple of that. However, it isn’t always this scientific and sometimes the price is what it is. Lenders will want to know how much consideration is due on day one, how much of that you want to borrow and if there’s any deferred consideration (payable over an agreed term like 5 years, for example).

What are Your Options?

When it comes to funding an MBO, you have a few options. There is no rule of thumb or one size fits all; every transaction is different. For the very best businesses that can satisfy everything we’ve discussed and demonstrate ample affordability, an unsecured business loan may be an option. Failing this, a secured business loan can be secured on business or personal assets to give the lender more comfort. If there are assets in the business such as property, plant and machinery, stock or receivables, then these can be used as security to inject funds into the transaction. In recent years, the asset-based lenders have become increasingly popular for this sort of finance. Typically they combine invoice finance, asset finance, property finance and sometimes an unsecured business loan to reach their goal.

If you’ve got the opportunity of a lifetime and want to talk to an expert debt adviser about funding an MBO, get in touch with Ping Finance now – we’re here to help you get your deal over the line.

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